How American oil companies have built their own fiefdom in northern Iraq.

By Steve LeVine<p>
Steve LeVine is a contributing editor at Foreign Policy, a Schwartz Fellow at the New America Foundation, and author of The Oil and the Glory.
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July 31, 2012

Less than a year after the departure of U.S. troops from Iraq, Baghdad is losing a primary lever over independent-minded Kurdistan — its grip on the northern region’s revenue-earning oil industry. Kurdistan’s secret weapon? Foreign oil companies are exasperated with Baghdad’s stinginess and allured by the Kurds’ more liberal terms for oil contracts.

These companies are becoming an unintentional fifth column in Kurdistan’s march toward economic autonomy. On July 31, France’s Total became the third big oil company to break with Baghdad by signing an unsanctioned oil deal with Kurdistan. Baghdad, intent on full mastery over the nation’s massive petroleum revenue, forbids oil companies from dealing directly with Kurdistan and instead requires them to bid for projects through the Ministry of Oil and to ship their oil through Baghdad-controlled pipelines.However, ExxonMobil, Chevron, and Total have now flouted Baghdad’s wishes, putting their oil deals in Iraq’s south at risk in the process. Their calculus is that despite the relative inferiority of Kurdistan’s oil reserves, the potential upside there outweighs the downside threat of possibly losing access to Iraq proper, according to oil company executives with whom I have spoken.

The pressure will now be on Baghdad to somehow stem what is looking like an oil-company rebellion. It’s yet another challenge for the Iraqi government, which is already struggling with rising violence and dropping oil revenue because of sagging global prices.

History has seen numerous states taken over by companies — one thinks, for instance, of the United Fruit Company’s activities in Latin America. But should this trend continue in Kurdistan, it would mark, as far as I recall, the first time that oil companies have been principal actors in a nation becoming effectively autonomous. Of course, it will be up to the Kurdistan Regional Government (KRG) to ensure that it is not swallowed up by the companies, which was the fate of some Central and South American countries in the 19th and early 20th centuries.

On the surface, the companies’ decision to spurn Baghdad seems foolish. Iraq is a huge prize in the oil business, with some 148 billion barrels of proven oil reserves — the second-largest conventional volume in the world. By comparison, the KRG claims to have another 45 billion barrels of oil under its own soil.

After Saddam Hussein’s overthrow in 2003, oil companies from around the world rushed in for the right to both rework old, debilitated fields, and to drill new ones. But Baghdad has exacted tight-fisted terms, signing only low-paying service contracts that effectively turn high-risk, high-return wildcatters into mere hired hands. Until recently, the world’s oil companies have bristled at the terms, but gone along in hopes of conventional production sharing agreements down the road. Now, the grumbling in the ranks is growing to a roar.

A fourth-round auction of oil properties in May showed both that Baghdad seems to have no intention of greater generosity — and also that the companies are fed up. Just three of 12 blocks on offer found successful takers.

In October, ordinarily ultraconservative Exxon uncharacteristically signaled the first sign of upheaval by signing an exploration deal with Kurdistan despite having an agreement to produce oil at Iraq’s West Qurna field. That seemed quite a gamble: West Qurna, after all, holds some 8.7 billion barrels of oil, and there was a distinct possibility that Baghdad would revoke the deal as punishment for Exxon’s opening to the Kurds. Now, Total’s decision — the purchase of a 35 percent stake in two exploration blocks in Kurdistan — makes what had been a gingerly tip-toeing toward the KRG look more like a headlong rush. Total did not respond to an email requesting comment.

Punishment has been meted out for the companies’ defiance: Exxon was barred from the latest auction, and Chevron, which has no current deal in the south, has been officially blacklisted from any future contracts. However, the companies don’t seem fazed in the least.

"We understand completely that if we enter into a contract in the north, we’re probably going to be blackballed in the south," an official from one of the companies told me on condition of anonymity. "So the question is, ‘Have we exhausted all our options for getting a deal in the south on terms that we would find acceptable?’"

The answer for companies headed for the door is yes, the official said. "I think that’s beginning to be borne out as a lot of companies are looking to renegotiate their terms," he told me.

"The terms in the north are much better. The government gets a stake, but the better you do, the more you get, and the terms are attractive," he said. Plus the overall conditions are "night and day better" in Kurdistan than in Baghdad, he said. "You fly into a very modern, efficient airport. There are good hotels, good infrastructure."

When combined with the Kurdish authorities’ already-existing plans to build independent oil and natural gas export pipelines out of Kurdistan that avoid the Arab regions of Iraq entirely, the oil deals look increasingly like a robust, commercial-led carving out of the region as a stand-alone entity. Some might call it another substantial piece of the puzzle toward the creation of the Kurds’ longstanding national dream — a state of their own.

Robin Mills, a former Shell geologist and author of The Myth of the Oil Crisis who does private consulting on Iraq, said in a Twitter exchange that the Total news is a "big blow" for Baghdad. As for Total itself, the company seemed to be taking on sub-par fields in Kurdistan — "not a crown jewel in return for risk they’re taking with Baghdad" — but that "perhaps Total just doesn’t see any risk with Baghdad any more."

Can the embattled Iraqi central government get the rebellious oil companies back in line? Patrick Osgood, deputy editor of Oil & Gas Middle East magazine, suggested in a tweet that Baghdad could respond by making "a quick fire sale [of Total’s fields] to Petrochina," the publicly traded arm of the state-controlled China National Petroleum Company. But even that may not solve Baghdad’s basic problem: "Can’t see it’s smart for Baghdad to be so reliant on Shell, BP, Russians & Chinese," Mills said.

Some messages that run counter to conventional wisdom stand out from this showdown: Oil companies, it turns out, will not pay any price for access to the biggest fields in the world, but in fact will seek greener pastures. Oil cannot be bottled up — it will find its market. And sometimes, a new state can take form without a shot fired or a single protester in the street.